AP News

OECD: Europe weighing on global economy

By Angela Charlton
November 27, 2012

PARIS (AP) — The global economy could easily slide back into recession if its major problems — like U.S. budget standoffs and Europe's lack of jobs — are left to fester, a leading international economic body said Tuesday.

In its half-yearly update, the Organization for Economic Cooperation and Development warned that the recovery will be "hesitant and uneven" over the coming two years and that a new major contraction cannot be ruled out.

"The world economy is far from being out of the woods," OECD Secretary-General Angel Gurría said. "Governments must act decisively, using all the tools at their disposal to turn confidence around and boost growth and jobs in the United States, Europe and elsewhere."

Gurria's downbeat assessment came as the OECD published a fairly glum set of predictions. Though the world economy is expected to grow by 3.4 percent next year, up from 2.9 percent this, the numbers mask big divergences around the world.

Though countries like China, Brazil and India are expected to see growth pick up, the more established economies that the Paris-based OECD traditionally monitors remain stuck in a rut.

In particular, the OECD was gloomier about Europe than in its last forecast six months ago, saying "the greatest threats to the world economy" lie in the 17-country eurozone, which continues to grapple with a debt crisis after three years. A deep global recession is also possible, it said, if the European crisis doesn't stabilize.

The downbeat report came despite recent indications that the crisis in the eurozone is ebbing. Earlier Greece's euro partners and the International Monetary agreed to hand over more bailout cash to the country, a move that's eliminated fears of an imminent bankruptcy.

The OECD is now predicting a 0.4 percent contraction this year for the eurozone, worse than May's 0.1 percent forecast. For next year, it's forecasting a further 0.1 percent fall, in contrast to the previous prediction of 0.9 percent growth.

It also downgraded its forecasts for the U.S. economy and warned that it could be worse if the White House doesn't clinch a deal with lawmakers on the budget. Assuming a deal is thrashed out, the OECD has penciled in growth of 2 percent for the U.S. next year, down from a forecast of 2.6 percent in May.

The OECD cautioned that growth outside the OECD — which comprises 34 developed economies mostly in North America and Europe - would be slightly faster but crimped by Europe's troubles.

"A slowdown has surfaced in many emerging market economies, partly reflecting the impact of the recession in Europe," said Pier Carlo Padoan, the OECD's chief economist.

The OECD also warned the U.S. and Europe against cutting spending too sharply and too quickly, saying that could further hurt growth prospects. It suggested that countries with stronger economies such as Germany and China could provide temporary fiscal stimulus to boost growth.

"Global prospects remain fragile, with strong downside risks, and are heavily dependent on the speed and decisiveness of policy actions," it said.

Padoan expressed concern about the so-called fiscal cliff in the U.S., automatic tax increases and steep spending cuts that take effect in January unless President Barack Obama and Congress reach a budget agreement.

"If the fiscal cliff is not avoided, a large negative shock could bring the U.S. and the global economy into recession," Padoan said.

The report argues for "measured" spending cuts and tax increases.

"Reducing the large federal budget deficit is necessary to restore fiscal sustainability, but this should be done gradually and in the context of a well-identified medium-term consolidation plan," Padoan said.

The report warned that unemployment would continue to rise in the eurozone from 11.1 percent this year to 12 percent in 2014, but that the rate in the U.S. would gradually decline to 7.5 percent in 2014.